Berger: Hidden costs of making wine

Buena Vista Winery grapes.

October 14, 2013, 1:46AM

10/14/2013

As with any agricultural product, wine goes through cycles similar to boom and bust, but what the consumer doesn't see are the bad times, which can occur for various reasons at any time.

There are hidden pitfalls in this game, which is not a game but a serious business with pressures that are not always visible.

Take, as one example, wineries that make only one wine and it is red. In no other business does the owner make a wine in one calendar year and not be able to sell it for two more years. Adding to that same problem, if the winery is using its own estate-grown fruit, there is at least a three-year period when the winery can't even pick fruit to make its first wine.

So here the turn-around is five years. Imagine trying to explain this to a novice tax official when you show five to six years of consecutive losses and maintain that you are in a viable business.

It gets worse. Imagine that you have a wine that costs $10 a bottle to make and that you can sell from your tasting room for $25. This more than covers all overhead and makes a small down payment on the investment. So you end up with a small profit.

But what happens when you can't sell all you make from that tasting room? You have two options:

1. Set up a sales arrangement with a wholesale company to sell your wine for you.

2. Set up your own in-the-field sales force and try to market the wines directly to retailers and restaurants.

Both scenarios are fraught with major hurdles.

In the first case, you sell your wine to the wholesaler for about 50 percent of what you sell it for in your tasting room ($12.50), and out of that you have to take all costs, including overhead. Result: You end up with no profit for reinvestment or salary for yourself.

In case No. 2, you incur all the costs associated with direct selling, such as hotel rooms, meals, airline tickets, etc.

Today, with the amount of wine filtering into the marketplace from more sources than ever before — including a record amount from other countries — the word "glut" is being heard almost daily. With such a plethora of wine comes marketplace demand for lower prices, and consequently, smaller winery profits.

So the shutdown of parts of the U.S. government, even if it lasts only a brief period of time, imposes potentially more costs to wineries — costs that weren't there just a few weeks ago.

The Tax and Trade Bureau, which is responsible for approving labels for wine, beer and spirits, is closed. And its already imposing workload will surely cost many wineries hidden dollars.

There is only so much tank space at wineries, and that means as the 2013 harvest is concluding, wineries must have access to available tank space for the new wines.

This means they need to bottle as much as they can to free up tank space, and this means gearing up bottling lines. Normally when a wine is bottled, it is labeled at the same time, saving money.

But if TTB fails to approve a winery's label, it means bottling wines without labels, then carting the wine away to a storage location to be labeled later when the label is approved.

Such a process, double handling of hundreds or thousands of cases of wine, is expensive in labor costs.

The bottom line here is that being in the wine business is not an automatic license to print money. Rather, it's a guarantee of that old saw: To make a small fortune in the wine business, start with a large one.

<b>Wine of the Week: 2012 Mount Nelson Sauvignon Blanc, Marlborough ($19)</b> — This stylish New Zealand entrant is made in the expected "lime, gooseberry, new-mown hay" herbal style, but the wine has striking tropical fruit notes as well, and a near-perfect balance. Unlike some New Zealand sauvignon blancs that are sweet in the finish, this one is aimed directly at the dinner table. Imported by Wilson Daniels, St. Helena.

As with any agricultural product, wine goes through cycles similar to boom and bust, but what the consumer doesn't see are the bad times, which can occur for various reasons at any time.

There are hidden pitfalls in this game, which is not a game but a serious business with pressures that are not always visible.

Take, as one example, wineries that make only one wine and it is red. In no other business does the owner make a wine in one calendar year and not be able to sell it for two more years. Adding to that same problem, if the winery is using its own estate-grown fruit, there is at least a three-year period when the winery can't even pick fruit to make its first wine.

So here the turn-around is five years. Imagine trying to explain this to a novice tax official when you show five to six years of consecutive losses and maintain that you are in a viable business.

It gets worse. Imagine that you have a wine that costs $10 a bottle to make and that you can sell from your tasting room for $25. This more than covers all overhead and makes a small down payment on the investment. So you end up with a small profit.

But what happens when you can't sell all you make from that tasting room? You have two options:

1. Set up a sales arrangement with a wholesale company to sell your wine for you.

2. Set up your own in-the-field sales force and try to market the wines directly to retailers and restaurants.

Both scenarios are fraught with major hurdles.

In the first case, you sell your wine to the wholesaler for about 50 percent of what you sell it for in your tasting room ($12.50), and out of that you have to take all costs, including overhead. Result: You end up with no profit for reinvestment or salary for yourself.

In case No. 2, you incur all the costs associated with direct selling, such as hotel rooms, meals, airline tickets, etc.

Today, with the amount of wine filtering into the marketplace from more sources than ever before — including a record amount from other countries — the word "glut" is being heard almost daily. With such a plethora of wine comes marketplace demand for lower prices, and consequently, smaller winery profits.

So the shutdown of parts of the U.S. government, even if it lasts only a brief period of time, imposes potentially more costs to wineries — costs that weren't there just a few weeks ago.

The Tax and Trade Bureau, which is responsible for approving labels for wine, beer and spirits, is closed. And its already imposing workload will surely cost many wineries hidden dollars.

There is only so much tank space at wineries, and that means as the 2013 harvest is concluding, wineries must have access to available tank space for the new wines.

This means they need to bottle as much as they can to free up tank space, and this means gearing up bottling lines. Normally when a wine is bottled, it is labeled at the same time, saving money.

But if TTB fails to approve a winery's label, it means bottling wines without labels, then carting the wine away to a storage location to be labeled later when the label is approved.

Such a process, double handling of hundreds or thousands of cases of wine, is expensive in labor costs.

The bottom line here is that being in the wine business is not an automatic license to print money. Rather, it's a guarantee of that old saw: To make a small fortune in the wine business, start with a large one.

<b>Wine of the Week: 2012 Mount Nelson Sauvignon Blanc, Marlborough ($19)</b> — This stylish New Zealand entrant is made in the expected "lime, gooseberry, new-mown hay" herbal style, but the wine has striking tropical fruit notes as well, and a near-perfect balance. Unlike some New Zealand sauvignon blancs that are sweet in the finish, this one is aimed directly at the dinner table. Imported by Wilson Daniels, St. Helena.